Comments On Weyerhaeuser's Q3 2013 Results

| About: Weyerhaeuser Co. (WY)

Weyerhaeuser (NYSE:WY) announced 3rd quarter 2013 results on October 25 in which sales for the quarter beat expectations by $.05. When it comes to timber companies, I prefer to look at year to date numbers rather than quarterly data. This is because timber and forest products companies have a certain amount of seasonality to their businesses. In addition, they also can shift harvest levels and mix from quarter to quarter, as they attempt to play the market. Also, their real estate business is quite lumpy. For these reasons, I believe YTD numbers are more meaningful.

Let's look at WY's 2013 YTD numbers. Year to date, Weyerhaeuser's sales are up 24% from 2012. Earnings are up 105%, EBITDA 62%, and cash from operations 99%. These are not bad numbers. Distributions paid used up about 50% of the cash from operations. Since the first of the year, WY unit prices are up about 7.7% versus about 20% for the S&P. The total return, with dividends is about 10.3%. The yield right now is about 2.8%. I have noticed that timber REIT unit prices seem to always run ahead of financial results. I attribute this to investors betting on the come, as far as housing starts are concerned. As of today, WY is about 6% below its 2013 high.

If we look at Weyerhaeuser's business units, EBITDA for timber was up 36% over last year. Wood products EBITDA was up 178%, cellulose fibers was down 6%, and real estate up 61% over 2012. As a percent of the whole, timber accounted for 35%, wood products 38%, cellulose fibers 20%, and real estate 7%. Last year, timber accounted for 40%, wood products 21%, cellulose fibers 33%, and real estate 6%. The large jump in wood products EBITDA underlines the rebound in home building. This was a combination of both higher prices as well a higher sales volume. For lumber, prices were up 25% and sales volume was up 12% over 2012. Recently lumber prices have come down some, but lumber prices have always been quite volatile. Housing starts for 2012 were 781,000 and for 2013, estimates are that housing starts will be just under 1,000,000. Overall, housing is rebounding although at a slower pace than most were expecting. This means WY still has a way to go until housing starts reach about 1.5 million, which is the long-term trend.

As most people are aware, Weyerhaeuser just purchased 645,000 acres of Pacific Northwest timberland from Brookfield Asset Management's Longview timberlands in July. The purchase price was about $2.6 billion. This increased their PNW presence by about 33% and should add significantly to earnings and cash generation. To pay for this acquisition, WY borrowed about 50% and issued about 7% in new units. At the same time, Weyerhaeuser is in the process of selling its home building business. The latest rumors say they are in final negotiations with Tri Pointe Homes for an estimated $2.7 billion, which is just about exactly what they paid for Longview. I estimate they will close about December 31.

What will WY look like after the sale of their home building business? If we just look at Q3 and annualize it, they will lose about $180 million in real estate EBITDA and $132 million in earnings. For timber, I estimate the Longview acres will add about $100 million in EBITDA and about $25 million in earnings. Earnings will be much lower than EBITDA because the new Longview acres will carry a high depletion rate unless WY pools all of their depletion. Depletion is a non-cash expense. If WY uses the $2.7 billion to reduce debt, they will save about $120 million in interest expenses. This simple example nets them a positive $40 in EBITDA and $13 million in earnings. I can also see an increase in distributions coming.

Housing is only at about 66% of its long-term trend line of about 1.5 million housing starts. This leaves allot of upside for WY's business. This coupled with the strong Asian export market in the Pacific Northwest, of which WY is a major player, makes WY look like a good buy at the current prices.

Disclosure: I am long WY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.